The Rise Of Institutional Involvement In The Crypto Market
In recent years, the cryptocurrency market has seen a substantial increase in institutional and corporate participation as they are now recognizing the inherent potential and value of cryptocurrencies and Web3 technologies. As a result, institutional investors and traders are keenly exploring strategies to incorporate digital assets into their portfolios, aiming for diversification and potentially higher returns. Such engagement has spurred multiple instances of change and impactful trends within the crypto landscape.
What Institutional Investors Bring to The Table
As institutional investors shoulder the duty of buying, selling, and managing assets on behalf of their clients, customers, members, or shareholders, it is imperative for them to develop expertise and sophisticated trading strategies for their own advantage. Most of the time, they place their emphasis on long-term investments, risk management, and macro market analysis. This approach to professional investment management not only fortifies market stability but also diminishes risk for individual investors by:
- Cushioning against Short-term Volatility: By directing their focus towards long-term investments, they create a buffer against the short-term fluctuations in the market. This, in turn, contributes to a more stable and resilient financial ecosystem.
- Minimizing Potential Losses: The dedication of institutional investors to risk management involves a thorough analysis and strategic allocation of assets. This meticulous approach aids in minimizing potential losses for themselves and their clients, including retail clients.
Anticipating Broader Economic Trends: Their macro market analysis enables them to foresee broader economic trends and make informed investment decisions accordingly. This foresight is crucial for navigating the complexities of the financial market and making strategic investments that yield positive returns in the long run.
A Sign of Maturity
It's a monumental moment for the crypto world when institutional investors start paying attention. Visualize a glaring billboard in a busy metropolis, announcing "Crypto Time Has Arrived!" to the millions of daily investor passersby. While this analogy may be a tad exaggerated, it's a fact that the movement of corporations often dictates the flow of people and capital. People somewhat have an impression that corporations bring legitimacy and credibility. For some playground that was once established to indulge a subset of early adopters that are mostly tech-savvy like the crypto market, this is a big deal.
Now that corporations consider crypto as a worthwhile investment, digital assets are also accessible to a wider range of investor populations. And when the population grows larger and larger, regulation and compliance will start to crop up as well, hopefully for the betterment of the industry. Regulation is not inherently “bad”, either; it just has to be intentioned towards the right audience, which is, in this case, individual investors. If they are more confident about the space, they will attract more people. After all, isn't it often the case that regulators are more inclined to intervene when there is a substantial amount of assets involved, as opposed to a negligible sum?
One noteworthy aspect of institutional participation is the increase in market capitalization, which subsequently also relates to how stable and popular the market is. Currently, the total market capitalization of cryptocurrencies hovers around the $1 trillion mark, a significant sum by any measure. During the heightened state of crypto's bull market in 2021, the number even reached a staggering $3 trillion, according to Coingecko.
Figure 1. Crypto’s Market Capitalization
Source: Crypto Macro Report by M3TA
However, when compared to the S&P 500 index, a stock index monitoring the stock prices of the 500 largest publicly traded U.S. companies, that boasts a current cap of approximately $37.16 trillion, it becomes evident that cryptocurrencies still have a considerable distance to cover (2).
The contrast between these two markets reveals a key dynamic. Cryptocurrencies are still grappling with strict regulatory measures imposed by various countries, which can limit their growth potential. In contrast, similar markets to stock such as Forex operate within a well-established regulatory framework, allowing it to achieve massive daily trading volume, one that goes up to $7.5 trillion a day on average (3). Without institutional investors, the landscape would be far less dynamic, with increased susceptibility to erratic price movements.
Institutional Crypto's Global Path
While you may notice numerous institutions now embracing cryptocurrencies, their initial stance was quite different. Back in 2014, New York regulators were actively exploring ways to control Bitcoin. Meanwhile, Wall Street's major banks were concerned that regulating cryptocurrencies would legitimize them, potentially posing a threat to the traditional finance industry. To counter this, they attempted to cast doubt on the digital asset industry.
During the World Economic Forum in Davos that year, Jamie Dimon, JPMorgan Chase's CEO, the largest bank in the United States, criticized Bitcoin as a "terrible" store of value often used for illicit purposes and H. Rodgin Cohen, a prominent lawyer in the finance industry, cautioned state regulators that the federal government held serious concerns about Bitcoin and its applications (4).
Figure 2. BTC price as of August 2023
Despite these efforts, Bitcoin businesses still had their license provided by the New York Department of Financial Services in 2015 (4), and JPMorgan Chase even announced their first stablecoin ‘JPM Coin’ in February 2019 (5).
However, in more recent years, the crypto industry has faced continuous setbacks, including the collapse of significant players like the crypto hedge fund 3AC, Terra (once the third-largest cryptocurrency ecosystem after Bitcoin and Ethereum), and the recent bankruptcy of one of the largest crypto exchanges FTX, etc. This continuous stream of negative news has contributed to distancing cryptocurrencies from achieving widespread global adoption.
To foster further growth in the crypto industry, it is imperative to garner support from institutional entities, thereby enhancing its appeal to investors and, crucially, securing acceptance within the regulatory frameworks of various countries. Numerous institutions have diligently pursued this goal. Fintech giants such as PayPal and Square, in addition to the mobile stock-trading platform Robinhood, have streamlined the process of buying, selling, and trading cryptocurrencies (6). PayPal has just launched its first stablecoin, PYUSD, for in-app usage, while prominent public companies like MicroStrategy have also notably augmented their Bitcoin holdings in 2023 (7), indicating a strong corporate trend towards embracing digital assets.
As time progresses, there is a discernible global trend toward the establishment of clearer regulatory guidelines for digital assets. This movement resembles a regulatory cascade, setting the stage for the development of strategic digital asset hubs in locations such as Singapore, Hong Kong, the United Arab Emirates (8), and Europe (9). Although the United States is still grappling with gray-area regulations, several fund companies have been diligently striving for years to gain approval for crypto ETFs, and it now appears to be a highly promising endeavor (10).
In fact, EY-Parthenon, a global strategy consulting arm has conducted a survey in 250+ institutions on their sentiment, use, and plans regarding blockchain and digital assets, and the results are surprisingly positive for crypto. (11)
Institutional Investor Sentiment
It appears that despite recent market turbulence, institutional investors are maintaining a long-term perspective on blockchain and digital assets and most of them still believe in the long-term potential. However, it could be a hurdle for them to make substantial investments without the presence of regulatory uncertainty and trusted players.
Figure 3. More than half of the institutions in each sector maintain the belief that the digital asset market has a long-term trajectory
Figure 4. Top 3 factors affecting institutions' investment decisions, namely regulations, trusted entities, and custody.
Institutional Investment Allocation
Institutions are moving forward with their investment strategies deliberately but with a positive outlook. A significant proportion of those who have already invested are dedicating 1% to 5% of their portfolios to digital assets or associated products. Looking into the future, institutions demonstrate a robust intention to augment their allocations, with steady expansion projected for 2024 or 2025, reflecting their careful yet hopeful approach. Presently, the prevalent focus lies on spot cryptocurrency investments, particularly in Bitcoin (BTC) and Ethereum (ETH). If the SEC approves spot Bitcoin ETF and spot Ether ETF, this figure is likely to grow even larger.
Figure 5. Most institutional investors commonly allocate 1%-5% of their investment portfolio for digital assets.
Figure 6. BTC and ETH are the most preferred cryptocurrencies for investment by institutional-grade investors.
Figure 7. Institutions are predominantly adopting a 2-3 year perspective towards the development of cryptocurrency.
The institutional involvement in the crypto market is set to profoundly impact its future. The increasing participation of institutional investors, who bring stability and credibility to the market, indicates a shift towards mainstream acceptance of digital assets. Despite recent setbacks in the crypto industry, fintech giants and public companies are actively embracing digital assets, and there is a discernible global trend towards clearer regulatory guidelines. As institutions continue to adopt a positive yet cautious approach towards digital asset investments, the crypto market is poised to experience steady growth, enhanced investor appeal, and broader global acceptance.
- Diana Ambolis on Blockchain Magazine, The Impact Of Institutional Investors On The Cryptocurrency Market, July 4, 2023
- YCharts, S&P 500 Market Cap (I:SP500MC), June 2023
- BIS Quarterly Review, The global foreign exchange market in a higher-volatility environment, December 05, 2022
- Emily Flitter on The New York Times, Banks Tried to Kill Crypto and Failed. Now They’re Embracing It (Slowly)., November 01, 2021
- Hugh Son on CNBC, JP Morgan is rolling out the first US bank-backed cryptocurrency to transform payments business, February 14, 2019
- Christophe Michot on CoinTelegraph, What’s shaping the future of the institutional crypto market?, February 13, 2022
- Parikshit Mishra on CoinDesk, Michael Saylor's MicroStrategy Now Holds Over $4.6B Worth of Bitcoin, June 28, 2023
- Connor Sephton on Decrypt, Hong Kong, UAE Central Banks Coordinate on Crypto Regulations, May 31, 2023
- Andrew Asmakov on Decrypt, Jacobi Asset Management Launch Europe's First Bitcoin ETF, August 15, 2023
- Ryan Ozawa on Decrypt, SEC Formally Accepts BlackRock Spot Bitcoin ETF Application for Review, July 16, 2023
- EY Parthenon, Staying the course: institutional investor sentiment toward blockchain and digital assets, April 2023
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